What Ancient China Can Teach Us About Trade

From time to time the American economy is put at serious and imminent risk by Washington policymakers. The increasing tendency toward isolationism and protectionism is just the latest threat, but it has many antecedents.

President Nixon’s adoption of wage and price controls presented one of the greatest follies in American economic policy. Nixon managed to inflict great harm on the economy while having zero net effect on inflation.

Nixon’s nonsense was then trumped by the follies of his successor plus one, Jimmy Carter, who supported a monetary policy popular among some economists at the time of rising inflation predicated on the belief individuals and businesses could be fooled into not noticing inflation’s acceleration.

Regulatory policy has recently been the scene of some of the biggest gaffes in economic policy. In the years leading up to the global financial crisis, America’s financial regulatory system suffered from outdated approaches, competing and overlapping agency jurisdictions, and a broad failure to construct effective means of cross-border coordination. This hampered appropriate oversight of the financial markets harming both firms and investors. Those failures cost the economy dearly.

Obama's priorities

The Obama Administration made a different kind of regulatory policy mistake. In judging the tradeoffs among alternative policy outcomes, the Obama Administration persistently decided in favor of some other goal over a strong economy. The preferred goal was sometimes achieved, but always at the expense of a stronger economy.

Many Americans are hurting after years of economic growth too weak to provide them grounds for hope of better days. They have a right to expect better, and it is human nature to seek out not just explanations for the economy’s weak performance, but the villains who caused it. Too often those incorrectly identified as villains are America’s trading partners. The growing momentum toward isolationism and protectionist policies is one consequence.

The hard reality is that robust trade among nations can easily be attacked with simplistic one-liners, and at a time when many are hurting, many are willing to be beguiled by those one-liners. Competition is tough, and often scary, even under the best of circumstances. Competition with foreign workers and companies which may have unusual advantages only heightens the uncertainty. Under just about any circumstances, competition means some win a lot, some win some, and some lose. Robust trade means more competition – more winners but also more losers. Often, the losers are those least able to bear the losses, like low-skilled workers. They hurt. They’re angry. And foreign competition makes a welcome target for their anger.

Nor does it help for those who defend free trade to dispute that America’s trading partners do indeed sometimes bend the rules badly. Bending rules sometimes occurs at home, so no one should pretend it doesn’t happen in cross-border trade. Robust trade driven by market forces will enjoy sufficient political support only if those who break the rules are caught and compelled to stop.

Policy makers need to understand and respond to the anger with real solutions that can help those hurt by trade without weakening the market system under which international trade flourishes. The cold reality is the alternative to vibrant, stressful competition is stagnation and decline. The history on isolationism is extensive and consistent – it is a sure prescription for national decline. Nearly a century ago, the United States suffered enormous pain when it enacted the Smoot-Hawley tariffs which, combined with the Federal Reserve’s abysmal monetary policy, helped produce the Great Depression.

Learning from Ancient China

Perhaps China’s Ming Dynasty provides the greatest historical example of isolationism’s effects. Chinese history is one of cycles, where one great dynasty rises up, dominates, suffers entropic decline, and is replaced by another. Before the Ming Dynasty, the Mongols ruled in the Yuan Dynasty beginning around 1271 after the great Kublai Khan crushed first the decaying Jin Dynasty in northern China and then the weakened Song Dynasty in the south.

By the middle of the 14th century China was badly fractured and subject to plagues, famines, and peasant revolts. A poor former Buddhist monk led a military force defeating all comers until he eventually captured what is today known as Beijing, named himself Emperor, claimed the “Mandate of Heaven”, and thereby established the Ming Dynasty. Following a long period of malaise, the Ming infused China with a tremendous new energy and a new efficiency in large part by restoring the ancient Confucian practices of central government.

The early Ming Emperors were highly successful in fostering prosperity. They built the Forbidden City, and the modern form of the Great Wall to protect against incursions from the north. They greatly encouraged international trade and protected it with a very efficient military, including a navy supported by one of the largest dockyards in the world at the time. The Ming referred to themselves as “The Middle Kingdom” and for good reason, as from their perspective they did indeed occupy the middle of the world, geographically, culturally, industrially, and militarily.

Having established their great domain, subsequent emperors rested in their vast prosperity and security. The Ming turned inward. They banned oceanic shipping, heavily restricted international trade, and forcibly moved vast populations inland, away from the sea. As they basked in their peaceful isolation, confident in their own superiority, China under the latter Ming stagnated while others advanced. Eventually, badly weakened, the cycle renewed, and the Ming were replaced by new armies marching out of Manchuria.

China’s leaders in the modern era beginning with Deng Xiaoping saw the disastrous consequences of looking only inward under Mao Zedong, and so Deng began the process of opening up to the rest of the world, a process that continues under China’s current leadership. As China’s President Xi observed in his April 8, 2013 remarks during the Boao Forum for Asia Annual Conference, China’s “We firmly oppose protectionism in any form, and we are willing and ready to solve economic and trade differences through negotiation.” (1) One guarantor of China’s future economic prosperity is its commitment to international economic engagement.

A nation either marches forward or it falls backward. There’s no standing still in economic competition. Marching forward is hard work and always carries risk, much as climbing a mountain, while falling backward requires little effort and always involves decay and decline. America must accept the challenge and run toward competition, not away from it.

America’s future greatness depends in part on aggressively pursuing two key goals. The first is the pursuit of pro-growth domestic policies to ensure America’s workers and companies are world-class competitors. President Trump has made a good start in this regard with his efforts to reverse the Obama administration’s regulatory edifice. The second key is aggressively pursuing international engagement emphasizing freeing American companies and workers to compete aggressively in world markets. Ultimately, the only reason a nation would forego the second goal of engagement is because it refused to pursue the first of girding to win in competition.

1. Xi Jinping, “The Governance of China”, pg. 126.

About the authors

J.D. Foster

Dr. J.D. Foster is the former senior vice president, Economic Policy Division, and former chief economist at the U.S. Chamber of Commerce. He explores and explains developments in the U.S. and global economies.